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Arco Vara AS Consolidated Annual Report 2015

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KEY PERFORMANCE INDICATORS

In 2015, the group’s revenue was 10.7 million euros, exceeding by 16% the
revenue of year 2014, when revenue amounted to 9.2 million euros. The increase
of the group’s annual revenue comes from Development division, where revenue
amounted to 7.9 million euros in 2015 (in 2014: 6.5 million euros). The revenue
of Service division reached to 3.3 million euros in 2015, increased by 4%
compared to 2014. The sales figures of brokerage and valuation services have
shown growth in second half of the year 2015, after the falling trend in second
half of year 2014 and in the beginning of year 2015. 

In 2015, the group’s operating profit (=EBIT) from continuing operations was
1.3 million euros and net profit 0.5 million euros, a year ago the same figures
were 2.3 million euros and 1.1 million euros respectively. The result of 2014
was impacted by two single events with total effect of 1.2 million euros on
profit: gain from the sale of a subsidiary and reversal of inventory
write-down. Loss from discontinued operations amounted to 15 thousand euros in
2015 and 324 thousand euros in 2014. 

The group has rapidly decreased debt burden in 2015. The group’s net loans have
decreased by 1.3 million euros in 2015, down to the level of 12.0 million euros
as at 31 December 2015. Total loans and borrowings amounted to 12.8 million
euros at 31 December 2015, decreased by 2.3 million euros through a year. As at
31 December 2015, the weighted average annual interest rate of loans was 5.0%.
This is a decrease by 0.8 percentage points compared to 31 December 2015. 

In 2015, 96 apartments and commercial spaces and four residential in projects
developed in the group were sold. In 2014, 77 apartments and commercial spaces
and 4 plots were sold. 

Continuing operations

                                       2015   2014
--------------------------------------------------
In millions of euros                              
--------------------------------------------------
Revenue                                           
--------------------------------------------------
Development                             7.9    6.5
--------------------------------------------------
Service                                 3.3    3.1
--------------------------------------------------
Eliminations                           -0.5   -0.4
--------------------------------------------------
Total revenue                          10.7    9.2
--------------------------------------------------
                                                  
--------------------------------------------------
Operating profit (EBIT)                           
--------------------------------------------------
Development                             1.8    1.9
--------------------------------------------------
Service                                -0.1    0.3
--------------------------------------------------
Unallocated income and expenses         0.1    0.0
--------------------------------------------------
Eliminations                           -0.5    0.1
--------------------------------------------------
Total operating profit (EBIT)           1.3    2.3
--------------------------------------------------
                                                  
--------------------------------------------------
Finance income and expense             -0.7   -1.1
--------------------------------------------------
Income tax                             -0.1   -0.1
--------------------------------------------------
Net profit                              0.5    1.1
--------------------------------------------------
                                                  
Main ratios                                       
--------------------------------------------------
                                       2015   2014
--------------------------------------------------
Earnings per share, EPS (in euros)     0.08   0.15
--------------------------------------------------
Diluted earnings per share (in euros)  0.07   0.14
--------------------------------------------------
ROIC (rolling, four quarters)          2.0%   3.4%
--------------------------------------------------
ROE (rolling, four quarters)           4.6%  10.7%
--------------------------------------      ------
ROA (rolling, four quarters)           1.8%   3.1%
--------------------------------------------------



                                                 
-------------------------------------------------
As at 31 December                      2015  2014
-------------------------------------------------
In millions of euros                             
-------------------------------------------------
Total assets                           24.5  27.0
-------------------------------------------------
Invested capital                       22.4  24.1
-------------------------------------------------
Net loans                              12.0  13.3
-------------------------------------------------
Equity                                  9.6   9.1
-------------------------------------------------
                                                 
-------------------------------------------------
Current ratio                          3.22  2.43
-------------------------------------------------
Quick ratio                            0.32  0.47
-------------------------------------------------
Financial leverage                     2.54  2.98
-------------------------------------------------
Average loan term (in years)            1.7   2.3
-------------------------------------------------
Average annual interest rate of loans  5.0%  5.8%
-------------------------------------------------
Number of staff, at period end          178   189
-------------------------------------------------

Cash flows

                                                  2015  2014
------------------------------------------------------------
In millions of euros                                        
------------------------------------------------------------
Cash flows from operating activities               2.4   0.4
------------------------------------------------------------
Cash flows from/used in investing activities      -0.2   0.2
------------------------------------------------------------
Cash flows from/used in financing activities      -3.2   0.3
------------------------------------------------------------
Net cash flows                                    -1.0   0.9
------------------------------------------------------------
                                                            
------------------------------------------------------------
Cash and cash equivalents at beginning of period   1.7   0.8
------------------------------------------------------------
Cash and cash equivalents at end of period         0.7   1.7
------------------------------------------------------------



Revenue and net profit/loss from continuing operations 
          Q1      Q2      Q3      Q4     Total    Q1      Q2      Q3      Q4   
 Total    Q1      Q2      Q3      Q4     Total 
         2013    2013    2013    2013    2013    2014    2014    2014    2014  
 2014    2015    2015    2015    2015    2015 
--------------------------------------------------------------------------------
---------------------------------------------- 
In 
 milli 
ons of 
 euros 
--------------------------------------------------------------------------------
---------------------------------------------- 
Revenu     1.7     3.5     3.5     2.0    10.7     1.1     1.1     1.2     5.8 
   9.2     4.4     2.1     2.1     2.1    10.7 
e 
--------------------------------------------------------------------------------
---------------------------------------------- 
Net        0.0     1.4     0.1     2.0     3.5     0.4    -0.3     0.4     0.6 
   1.1     0.7     0.0     0.2    -0.4     0.5 
 profi 
t/loss 
--------------------------------------------------------------------------------
---------------------------------------------- 

FORMULAS USED

Earnings per share (EPS) = net profit attributable to owners of the parent /
(weighted average number of ordinary shares outstanding during the period – own
shares) 
Invested capital = current interest-bearing liabilities + non-current
liabilities + equity (at end of period) 
Net loans = current interest-bearing liabilities + non-current liabilities –
cash and cash equivalents – short-term investments in securities (at end of
period) 
Return on invested capital (ROIC) = past four quarters’ net profit / average
invested capital 
Return on equity (ROE) = past four quarters’ net profit / average equity
Return on assets (ROA) = past four quarters’ net profit / average total assets
Current ratio = current assets / current liabilities
Quick ratio = (current assets - inventory) / current liabilities
Financial leverage = total assets / equity
Number of staff at period-end = number of people working for the group under
employment or authorization (service) contracts 



Group Chief Executive’s review

One should start the year’s end with a resume. The resume is as follows: we
were profitable and grew. Yet the fourth quarter and full year results turned
out weaker than we expected. We expected the group’s revenue to be at least 11
million euros and net profit at least 1 million euros. Actually we achieved
10.7 million euros revenue and only 0.5 million euros net profit. The
management is not proud at all. We need to improve our results. The following
part of comments sums up, what has been done and what exactly should be
improved in order to keep the group moving forward with necessary speed. 

Service division

The equity in service division companies is negative and during 2015 we did not
invest additional equity into them. The division as a whole operates on the
edge of profitability, although countrywise the results are different. We are
pleased with profitable results and cash earned during 2015 by our Bulgarian
unit. Considering the Latvian real estate market’s prolonged weakness, the
Latvian unit’s results were satisfactory. The single outstanding loss-making
unit of the group is in Estonia. The reasons of loss lie within the company
itself and the solutions are in the hands of management. We have started
rearrangements within the service division to improve the work processes and
along with rearrangements, executed also replacements in the middle management. 

The objective of 2016 is to achieve the profitability of services division as a
whole and also increase its usability factor for Arco’s development projects –
both in preparatory and in sales phase. 

In the big picture the group’s results are determined by development division,
where 100% of the group’s equity is allocated to. Development division’s
results in turn are determined overwhelmingly by three pillars within it: (i)
Madrid Blvd cash flow property in Sofia, (ii) Manastirski residential
development in Sofia (and its possible successor project Izstok Parkside) and
(iii) Kodulahe residential development in Tallinn. 

Madrid Blvd property

By publication date of this report, the renovation works of 1st and 2nd floor
office space and restructuration of it into seven autonomous lettable office
units has been completed. There are ongoing negotiations with potential
tenants. The post-restructuration gross lettable area (GLA) of the office space
is ca 4,700 sqm, in addition to 113 underground parking places, that are rented
out by piece. 

Since there was no rent income from the offices during their renovation in Q4,
it affected negatively annual revenue and profit. The loss of income from rents
and maintenance fees amounted to more than 150 thousand euros. The impact to
net profitability is approximately the same amount. It is one of the reasons,
why we did not achieve our annual revenue and net profit target. 

Our objective is 100% coverage of the office spaces with long-term lease
contracts during Q3 of 2016 at the latest. 

In other parts of the property we continue profitable operation of the lettable
premises (incl. shopping area GLA ca 2,200 sqm and short-term rental apartments
GLA ca 1,500 sqm) and sale of remaining apartments (GSA ca 1,700 sqm). In Q4,
pre-sale agreements were concluded for two apartments, revenue for which will
be recognized in 2016. The remaining balance of Piraeus bank loan on the
property is below 10.5 million euros. 

Manastirski Livadi

Construction of Block D was complete in November and the permission of usage
was issued on 22 December, ie more than 2 weeks later than we forecasted. Due
to this delay we had to suspend also execution of many apartments’ sales
agreements and accounting of respective revenue in our books into Q1 2016. Q4
revenue from Manastirski Block D amounted to 628 thousand euros. The negative
impact of the delay on targeted Q4 and full year results amounted to 800
thousand euros in revenue and over 300 thousand euros in net profit. The good
news is that the missed revenue and profit is carried over into Q1 2016 revenue
and net profit. However, the delay is also a live demonstration, how exposed
the group’s results and key parameters such as ROE and ROA are to loss of time,
even only for two weeks. 

By end of Q4, 95% of apartments in Block D were presold. As at the publication
date of this report, the whole Manastirski Livadi project is completed and the
outstanding bank loan to UniCredit Bulbank repaid in full. Expected free
cashflow from Block D alone is expected to exceed 2 million euros. 

Since the beginning of Q1 2016 we can concentrate only to selling out the last
remaining products in Manastirski. Our objective is full sale of outstanding
inventory by end of 2016 at the latest. However the main focus from now on is
on commencement of successor project in Sofia during Q1. At the moment the
selected successor project is Izstok Parkside. By end of Q4, the preconditions
of closing the purchase contract were not yet fulfilled by the Seller. 

Kodulahe

Our long term efforts eventually bore fruit by end of year and we could select
amongst competing offers both the best bidder of finance and construction works
for the first stage of Kodulahe project in Tallinn. After the reporting date -
in February 2016, financing and construction contracts were signed. 

Kodulahe first phase volume is 130 apartments and shops (GSA ca 8,700 sqm), and
in addition to it respective number of parking places and storages. Gross
build-up area (GBA) for phase one exceeds 15,000 sqm.  Expected sale revenue of
first phase exceeds 15 million euros and conclusion of presale contracts was
started in February 2016. 

In summary, Arco Vara is back on Tallinn residential development market with
Kodulahe project. Comparing with Sofia, Tallinn residential market is less
stormy and has tighter competition, but it is possible to make money here, too. 

Other directions of development

Besides the three development pillars described above we have undertaken two
additional directions:  A. to sell off all assets, that are not
production-ready immediately or where the development volume is too small.
Selling off the land bank that the group has historically accumulated allows us
to concentrate our forces for developments that really matter; and B. launch
Arco Real Estate Investment Trust (Arco REIT) in Sofia. We want to engage
external capital under our management and continue in Bulgaria with targeting
and implementation of new development projects, utilizing the knowhow and
reputation of Arco’s team. 

In terms of selling off the assets, the autumn of 2015 was successful. We sold
profitably two development projects: Instituudi road properties in Harku parish
and Suur-Sepa properties in Pärnu. It’s worth noting that it took only three
weeks from the moment of communicating the sales team the order to commence the
sale, until the moment of receiving sale price to the account. It gives
credibility to our own conservative valuation of our assets in our books. We
will continue selling off other properties and adding maximum value before
that, for example by achieving construction rights through a detail plan or
otherwise. For example, the detail plan allowing 8-floor office building onto
Liimi 1b, Tallinn, entered into force in Q4. 

Arco REIT project has progressed as anticipated. Shortly after the publication
date of this report, Arco REIT will be listed on Sofia stock exchange where
Arco Vara is the sole shareholder (by end of the year shareholding was 70%). We
have placed 332 thousand euros into its share capital. The next and crucial
step ahead is issue of additional shares and raising external capital into the
fund during 2016, in order to commence effective business operations by end of
the year. 

Summary

To sum up with what I began with: 2015 profit of 0.5 million euros does not
meet management’s expectations (1 million euros). 

In addition to already described reasons of smaller profit (suspended
Manastirski D sale: negative effect of ca 300 thousand euros; and dropping rent
income from Madrid Blvd offices in Q4: negative effect of ca 150 thousand
euros) there is one more accounting factor that killed part of the profit. It
is the accounting effect of share option issued to the management in 2013, what
entitles the option holder to subscribe 390,000 Arco Vara shares at 70 cents
per share during 2016. 

According to IFRS regulations, the company must account in the income statement
also the effect of share option issued to the management board. According to
the prescribed methodology, the effect has to be measured as difference between
the nominal acquisition price (70 cents) and the measurement price determined
according to the rules (1.46 cents). Respective provision into equity reserve
had to be established. The cost of establishing the provision is distributed
between 2.5 years since issue of the share option in July 2013 until January 1
2016 (first possible date for using the option). Respective cost for 2015 year
is 119 thousand euros. The 2013 share option will not impact in any way the
profit statement of 2016 or following years. 

While being the stakeholder and cause of the additional 119 thousand euros
accounting loss, the management board would still like to point out that there
is no effective damage to the company. In order to effectuate the option, one
has to pay into the company share capital 273 thousand euros and to improve the
cash position of the company. The option does not give any right to cash out
from the company. 

The company’s target revenue for 2016 is 10.3 million euros and net profit 0.8
million euros. Year 2016 should be distinct from 2015 with one big feature:
instead of one development under construction with revenue potential of ca 4-5
million euros (Manastirski D construction in Sofia), there should be two
developments under construction with revenue potential of ca 20 million euros
(Kodulahe 1st phase in Tallinn and Manastirski successor project in Sofia).
That positive dynamics should reflect strongly in 2017 results. 



SERVICE DIVISION

In 2015, revenue of service division was 3,254 thousand euros (in 2014: 3,139
thousand euros), that included intra-group revenue of 467 thousand euros (in
2014: 451 thousand euros). Revenue of service division from main services (real
estate brokerage and valuation services) was 2,926 thousand euros increased by
2% compared to previous year. Revenue continues to increase in Bulgaria, seeing
39% annual increase. The revenue increased by 10% also in Estonian agency. The
revenue from main services is strongly decreasing in Latvian real estate
agency, having decreased by 23%. 

Revenue of real estate agencies from brokerage and valuation

                        2015   2014  Change, %
----------------------------------------------
In thousands of euros                         
----------------------------------------------
Estonia                1,282  1,166        10%
----------------------------------------------
Latvia                   898  1,170       -23%
----------------------------------------------
Bulgaria                 746    536        39%
----------------------------------------------
Total                  2,926  2,872         2%
----------------------------------------------

In 2015, the Estonian and Latvian agencies have operated on a loss: 209
thousand and 73 thousand euros, respectively. In 2014, Estonian and Latvian
agencies had net profit of 48 thousand euros and 65 thousand euros,
respectively. The decrease in profitability of Estonian agency is caused by
significant increase of marketing and IT expenses: the goal is set to reach
higher level in revenues and accordingly growth of profit. Revenues will
increase with the help of wider reputation and bigger number of contacts,
customer oriented data processing and smarter work environment. Bulgarian
agency’s net profit was 109 thousand euros in 2015 (in 2014: 90 thousand
euros). 

In addition to brokerage and valuation services, the service division also
provides real estate management services as well as accommodation service in
Bulgaria. The revenue from real estate management was 141 thousand euros in
2015, 105 thousand euros of which was intra-group revenue (in 2014: 148
thousand and 105 thousand euros, respectively). Revenue from accommodation
services amounted to 132 thousand euros in 2015 (in 2014: 74 thousand euros).
In 2015, the sales of accommodation service have shown a nice 78% growth. 

The number of staff in service division has been decreased down to 165
employees as at 31 December 2015, which is 11 people less compared to year end
2014. The number of staff is decreased in Estonia and Latvia and increased in
Bulgaria. 

DEVELOPMENT DIVISION

In 2015, revenue of development division totalled 7,947 thousand euros (in
2014: 6,503 thousand euros). The leap in revenues comes from the sale of
properties in the group’s own development projects, amounting to 7,019 thousand
euros in 2015 (5,414 thousand euros in 2014). 

Most of the remaining revenue of development division consist of rental income
from commercial and office premises in Madrid Blvd building in Sofia, amounted
to 838 thousand euros in 2015 (in 2014: 953 thousand euros). In 2015, rental
income has decreased due to conclusion of rental agreements in Q3, after which
the rental spaces were renovated. In first half of 2016, the search of new
tenants is in pipeline. The rental income is planned to recover on the previous
level in Q3 2016 at latest. 

In 12 months 2015, operating profit of development division was 1,790 thousand
euros. In 2014, was earned 1,942 thousand euros of operating profit. 

By December 2015, the apartment building of third stage in Manastirski Livadi
project has been completed and permit of use has been obtained on 22 December.
In 2015, 13 apartments were handed over, which corresponds to revenue of 628
thousand euros. As at 31 December 2015, 76 apartments out of 80 and one
commercial space out of 8 have been sold or presold. 

In 2015, 92 apartments and commercial spaces were sold in the group’s Bulgarian
projects (in 2014: 63 apartments and commercial spaces). At 31 December 2015,
two commercial spaces and some parking places remained in stock from first two
stages of Manastirski Livadi project (blocks C and AB). 26 apartments and 113
parking places remained unsold in Madrid Blvd complex in Sofia. 16 apartments,
out of all Madrid Blvd unsold apartments, are rented out on providing
accommodation service. Unsold parking places are also rented out. 

In 2015, four last apartments were sold in Bishumuiza-1 project in Latvia. That
means the whole project could be considered as closed for the group. There
remains 14 residential plots in Marsili to be sold in from the group’s stock in
Latvia. A presale agreement was concluded for one of these plots in December
2015. 

By Q4 2015, a goal was set to start construction of the first stage apartment
building (with 125 apartments and 5 commercial spaces) in Kodulahe project in
Tallinn. Design project was concluded and permit for construction of apartment
building was obtained at the end of September. After the reporting date - in
February 2016, the construction and financing contracts have been signed as
well as the first apartment presale agreements. The construction of the
apartment building started in March 2016. 

In June 2015, a smaller land plot in Suur-Sepa street, in centre town of Pärnu,
was acquired as an addition to the group’s land bank. The plot is suitable for
apartment building. After preparing preliminary design the plot was sold
profitably at the beginning of October. Also at the beginning of October, the
group sold another smaller development: Instituudi road residential development
project, acquired in February 2014. The latter project was also up-valued with
the preliminary design. Selling smaller projects bears the goal of focusing on
most important projects in Estonia and Bulgaria. 

At 31 December 2015, 5 people were employed in development division, the same
number as at the end of year 2014. 

SUMMARY TABLE OF ARCO VARA’S ACTIVE PROJECTS AS AT 31 DECEMBER 2015

Project   Address       Product  Stage  Area of       GSA / GLA      No of units
 name                    main           plot(s)   (above grade)    (above grade)
                         type              (m2)    available or     available or
                                                        <future  <future target>
                                                        target>                 
--------------------------------------------------------------------------------
Manastir  Manastirski,  Apartme  S5           -             140                2
ski A/B    Sofia        nts                                                     
--------------------------------------------------------------------------------
Manastir  Manastirski,  Apartme  S5           -           5,832               75
ski D      Sofia        nts                                                     
--------------------------------------------------------------------------------
Madrid    Madrid Blvd,  Lease:   S5/S6        -           7,350               21
 Blvd      Sofia         Retail                                                 
                        /Office                                                 
--------------------------------------------------------------------------------
Madrid    Madrid Blvd,  Apartme  S5/S6        -           3,216               28
 Blvd      Sofia        nts                                                     
--------------------------------------------------------------------------------
Marsili   Marsili,      Residen  S5           -          25,389               14
 residen   near Riga    tial                                                    
tial                     plots                                                  
 plots                                                                          
--------------------------------------------------------------------------------
Marsili   Marsili,      Residen  S2     120,220       <120,220>             <68>
 residen   near Riga    tial                                                    
tial                     plots                                                  
 plots                                                                          
--------------------------------------------------------------------------------
Kodulahe  Lahepea 7,    Apartme  S3       6,102           8,732              130
, stage    Tallinn      nts                                                     
 1                                                                              
--------------------------------------------------------------------------------
Kodulahe  Lahepea,      Apartme  S2      22,396        <13,300>            <200>
, stages   Soodi, Pagi  nts                                                     
 2-5       streets,                                                             
           Tallinn                                                              
--------------------------------------------------------------------------------
Lehiku    Lehiku 21,23  Apartme  S2       5,915         <1,100>              <5>
 carpet    Tallinn      nts                                                     
 buildin                                                                        
g                                                                               
--------------------------------------------------------------------------------
Liimi     Liimi 1b,     Lease:   S2/S5    2,463         <6,500>                1
           Tallinn       Office                                                 
--------------------------------------------------------------------------------
Viimsira  Haabneeme,    Office/  S3/S5   14,174             500                1
nna        Viimsi vald  Mix                                                     
--------------------------------------------------------------------------------

Note: Value presented inbetween < > means future target value as the project is
in early (S1, S2) development stage and the building rights or the design have
not been finished yet. The table does not reflect sellable or lettable volumes
below grade including parking spaces and storages. The table does not give
complete overview of the group’s land bank. 

Description of stages

S1: Land plot acquired
S2: Building Rights Procedure
S3: Design and Preparation Works
S4: Construction
S5: Marketing and Sale
S6: Property Management and/or Lease



PEOPLE

As at 31 December 2015, 178 people worked for the group (189 as at 31 December
2014). Employee remuneration expenses in 2015 amounted to 2.7 million euros (in
2014: 2.5 million euros). 

The remuneration of the member of the management board/chief executive and the
members of the supervisory board of the group’s parent company including social
security charges in 2015 amounted to 108 thousand euros (102 thousand euros in
2014). 

The management board

The management board of Arco Vara AS has one member. Since 22 October 2012, the
chief executive officer/member of the management board of Arco Vara AS has been
Tarmo Sild. The mandate of the chief executive was prolonged by 3 years (until
October 2018) on the supervisory board meeting held in September 2015. 

The members of supervisory board

At 31 December 2015, supervisory board of Arco Vara AS consists of 5 members.
As at 31.12.2014, the supervisory board had 7 members. At the extraordinary
shareholders meeting held on 10 February 2015, previous supervisory board was
recalled and new supervisory board with 5 members was elected. Hillar-Peeter
Luitsalu, Allar Niinepuu and Rain Lõhmus, remained from the previous
supervisory board and two new members are Steven Yaroslav Gorelik and Kert
Keskpaik. The members of previous supervisory board Toomas Tool, Arvo Nõges,
Aivar Pilv and Stephan David Balikn will not continue in new board. 

SOCIAL RESPONSIBILITY

Main business lines of Arco Vara are real estate development, real estate
brokerage and valuation services. Therefore, our social responsibility has
several important dimensions. 

Firstly, society uses real estate valuation service mainly on valuating loan
guarantees. Both, production and consumption, and part of it also real estate
market, are based largely on loan relations. The latter in turn is based on
guarantees. Expertise given to the value of real estate property as loan
guarantee therefore influences creditor’s evaluation of risks and decisions to
boost capital onto the credit market. Too optimistic valuation policies might
support initiating real estate bubble and irresponsible borrowing. Overly
conservative valuation policies might slow down normal market activity and
growth. Total value of properties valuated by the group only in Estonia exceeds
200 million euros a year and whereby having considerable effect on functioning
balanced real estate market. Therefore, the group has a policy that expert
opinions are appraised only by certified valuators, who are guided by the
minimum requirements set out by professional organisations and additional
intra-group rules. History of provided services to each valuated object will be
stored in Arco Vara database. That includes object view i.e all previously
issued appraisals can be found for the object to ensure better consistency of
valuations. 

Secondly, bonus value of real estate mediation services embodies sharing true
and competent information between people. Bonus value of brokerage service, if
compared with real estate portal mediation service, is in the amount,
verifiability and truthfulness of additional information. The role of the
broker in gathering information is to represent interest of both: his/her
client (who initiates the deal) and possible counterparty. Both parties should
have equal and verified information in all important questions on concluding
the transaction. Therefore, the group’s policy concerning brokerage services is
to accept for mediation only verified property eligible for transaction.
Transaction eligibility, depending on the type of the property, means prior
inspection of the property, prior review of legal aspects and control of the
person (i.e. whether he/she is the owner?) initiating the transaction. To
comply it’s standards, Arco Vara will not mediate uncontrolled real estate
transactions. 

Thirdly and most importantly, real estate products developed in the group will
have an effect on appearance and usage functions of future cities. Therefore we
always evaluate beside business aspects broader impact of our activities and
expect to achieve maximum positive result in following areas: 

  -- detail planning and design of living environment (not only design of
     individual building);
  -- architectural solution as a form that has the most long-term impact on
     people;
  -- room planning;
  -- technological shift, that means each new development product will be a
     seedbed for some new technology, we do not make the same things all the
     time;
  -- building quality and optimization of operating costs, that means our
     interest is to develop products with long-lasting usage value and endure
     generation after generation.

Arco Vara turns special attention to well-being of its employees and
improvement of working conditions – in 2015, we renewed offices and organised
joint events. In our everyday work we are following sustainability principles
by using digital possibilities – digital signature, digital archiving and
intra-office data processing without physical data carriers. 

We inspire and encourage our people to participate voluntarily in charity
projects and contribute to environmental initiatives. Our people are
participating in support of orphanage children and activities for the benefit
of community. 


SHARE AND SHAREHOLDERS

Arco Vara AS has issued a total of 6,117,012 ordinary shares with nominal value
of 0.7 euros per share. The shares are freely traded on NASDAQ OMX Tallinn
stock exchange. As at 31 December 2015, the company had 1,600 shareholders (at
31 December 2014: 1,668) including 1,381 individuals as shareholders (at 31
December 2014: 1,441 individuals). The share price closed at 1.15 euros. The
price has increased by 39% within year 2015 (closing price at the end of 2014
was 0.828 euros). During the period, the highest price per share was 1.29 euros
and lowest price 0.83 euros. As at 31 December 2015, market capitalization of
shares amounted to 7,035 thousand euros and P/E ratio of the share was 15.8 (at
31 December 2014: 5,065 thousand euros and 5.5, respectively). 

Major shareholders at 31 December 2015  No of shares  Interest %
NORDEA BANK FINLAND PLC client               862,820       14.1%
AS Lõhmus Holdings                           602,378        9.8%
Gamma Holding Investment OÜ                  565,356        9.2%
Alarmo Kapital OÜ                            489,188        8.0%
LHV PENSIONIFOND L                           389,765        6.4%
FIREBIRD REPUBLICS FUND LTD                  356,428        5.8%
OÜ HM Investeeringud                         325,505        5.3%
FIREBIRD AVRORA FUND, LTD.                   185,800        3.0%
LHV PENSIONIFOND XL                          173,583        2.8%
FIREBIRD FUND L.P.                           150,522        2.5%
Other shareholders                         2,015,667       33.0%
----------------------------------------------------------------
----------------------------------------------------------------
Total                                      6,117,012      100.0%



Holdings of members of the management and    Position              No of  Intere
 supervisory boards at 31 December 2015                           shares    st %
Rain Lõhmus (AS Lõhmus Holdings)             member of           602,378    9.8%
                                              supervisory                       
                                              board                             
Tarmo Sild and Allar Niinepuu (Alarmo        member of           489,188    8.0%
 Kapital OÜ)                                  management                        
                                              board/                            
                                             member of                          
                                              supervisory                       
                                              board                             
Hillar-Peeter Luitsalu (OÜ HM                chairman of         364,259    6.0%
 Investeeringud, related persons)             supervisory                       
                                              board                             
Kert Keskpaik (privately and through K Vara  member of           194,633    3.2%
 OÜ)                                          supervisory                       
                                              board                             
Steven Yaroslav Gorelik ¹                    member of             3,150    0.1%
                                              supervisory                       
                                              board                             
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Total                                                          1,653,608   27.0%

¹ - Steven Yaroslav Gorelik is active as fund manager in three investment funds
holding interest in Arco Vara (Firebird Republics Fund Ltd, Firebird Avrora
Fund Ltd and Firebird Fund L.P) of 692,750 shares (total of 11.3% interest). 

DESCRIPTION OF THE MAIN RISKS

Strategic risk

Most of the group’s equity is placed in real estate development. The group is
focused mainly on residential real estate development where development cycle
lasts for years consisting of detail planning, designing, construction and sale
- starts from purchase of land plot and finishes with the sale of end products
to customers. The equity is invested mainly in starting phase of the cycle
(purchase of land) on the assumption that there will be a demand for certain
products in the future. Considering that the demand for development product is
largely based on forecast and not on transaction then the main risk for the
group is investing equity to the development product for which there is no
demand in the future. 

For mitigating the risk: (i) the group invests equity into different
development projects in different markets (in 2016, in Sofia and Tallinn), (ii)
monitors current demand and supply in its home markets and (iii) makes efforts
to narrow the time between moment of investment and moment when the demand is
rising - signing pre-agreements with clients, purchases land without using
equity or postpones it using project financing alternatives where equity
placement is not necessary. 

Credit risk

The group’s credit risk arises mainly from two sources: real estate development
activities and reliability of the banks where bank deposits are placed. As on
real estate transactions a lot of counterparty financing goes through banks,
co-operation with different financing banks is common to mitigate counterparty
risk. And not all cash and cash equivalents are placed on the same banking
group. As a consequence, the group considers credit risk as substantially
mitigated. 

Liquidity and interest rate risks

The base currency of all of the group’s loan agreements is euro and the base
interest rate is 3 or 6 months EURIBOR. As a result, the group is exposed to
developments on the international capital markets. The group does not use
hedging instruments to mitigate its long-term interest rate risk. In 2015, the
group’s interest-bearing liabilities have decreased by 2.3 million euros and at
31 December 2015 amounted to 12.8 million euros, of which 2.3 million euros is
due within next 12 months. At the same time, the group’s cash and cash
equivalents totalled 0.7 million euros as at 31 December 2015 (at 31 December
2014: 1.7 million euros). In 2015, interest payments on interest-bearing
liabilities totalled 0.8 million euros (in 2014: 1.1 million euros). The
group’s weighted average loan interest rate was 5.0% as at 31 December 2015.
This is a decrease by 0.8 percentage points if compared to the end of year
2014. The main reason for the decrease of average interest rate is the
premature redemption of bonds in February 2015. The bonds bore higher than
average interest rate. Marginal effect had also the decrease of EURIBOR rates
even below zero-level. 

Currency risk

Purchase and sales contracts of provided services are mostly signed in local
currencies: euros (EUR) or Bulgarian lev (BGN). Real estate sales are mostly
nominated in euros, as a result of which the group’s assets and liabilities
structure does not denote a significant currency risk. The group is not
protected against currency devaluations. Most liquid funds are held in demand
or short-term deposits denominated in euros. 



Consolidated financial statements

Consolidated statement of comprehensive income

                                                Note    2015    2014
--------------------------------------------------------------------
In thousands of euros                                               
--------------------------------------------------------------------
Continuing operations                                               
--------------------------------------------------------------------
Revenue from sale of own real estate                   7,019   5,414
--------------------------------------------------------------------
Revenue from rendering of services                     3,633   3,744
--------------------------------------------------------------------
Total revenue                                   5,7   10,652   9,158
--------------------------------------------------------------------
                                                                    
--------------------------------------------------------------------
Cost of sales                                    8    -6,865  -5,902
--------------------------------------------------------------------
Gross profit                                           3,787   3,256
--------------------------------------------------------------------
                                                                    
--------------------------------------------------------------------
Other income                                     9        80      37
--------------------------------------------------------------------
Marketing and distribution expenses             10      -530    -324
--------------------------------------------------------------------
Administrative expenses                         11    -2,020  -1,811
--------------------------------------------------------------------
Other expenses                                   9      -151     -82
--------------------------------------------------------------------
Gain on revaluation of investment property      20        95       0
--------------------------------------------------------------------
Gain on reversal of inventory write-down        19         0     572
--------------------------------------------------------------------
Gain on transactions involving joint ventures   12         0     -27
--------------------------------------------------------------------
Gain on sale of subsidiary                     12,31       0     662
--------------------------------------------------------------------
Operating profit                                       1,261   2,283
--------------------------------------------------------------------
                                                                    
--------------------------------------------------------------------
Finance income and costs                        13      -666  -1,062
--------------------------------------------------------------------
Profit before tax                                        595   1,221
--------------------------------------------------------------------
Income tax                                      14      -135     -75
--------------------------------------------------------------------
Net profit from continuing operations                    460   1,146
-----------------------------------------------------        -------
                                                     --------       
                                                                    
-----------------------------------------------------        -------
                                                     --------       
Discontinued operations                                             
-----------------------------------------------------        -------
                                                     --------       
Loss from discontinued operations               31       -15    -324
-----------------------------------------------------        -------
                                                                    
--------------------------------------------------------------------
Net profit for the period                                445     822
--------------------------------------------------------------------
attributable to owners of the parent                     467     803
--------------------------------------------------------------------
attributable to non-controlling interests                -22      19
--------------------------------------------------------------------
                                                                    
--------------------------------------------------------------------
Total comprehensive income for the period                445     822
--------------------------------------------------------------------
attributable to owners of the parent                     467     803
--------------------------------------------------------------------
attributable to non-controlling interests                -22      19
--------------------------------------------------------------------
                                                                    
--------------------------------------------------------------------
Earnings per share (in euros)                   15                  
--------------------------------------------------------------------
- basic                                                 0.08    0.15
--------------------------------------------------------------------
- diluted                                               0.07    0.14
--------------------------------------------------------------------



Consolidated statement of financial position

                                            Note     31 December     31 December
                                                            2015            2014
--------------------------------------------------------------------------------
-------------------------------------------------                ---------------
In thousands of euros                                                           
                                                 ----------------               
Cash and cash equivalents                    17              745           1,691
--------------------------------------------------------------------------------
Receivables and prepayments                  18              679           1,205
--------------------------------------------------------------------------------
Inventories                                  19           12,818          11,970
--------------------------------------------------------------------------------
Total current assets                                      14,242          14,866
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Receivables and prepayments                  18                0               5
--------------------------------------------------------------------------------
Investment property                          20            9,513          11,585
--------------------------------------------------------------------------------
Property, plant and equipment                21              489             434
--------------------------------------------------------------------------------
Intangible assets                            21              229             113
--------------------------------------------------------------------------------
Total non-current assets                                  10,231          12,137
--------------------------------------------------------------------------------
TOTAL ASSETS                                              24,473          27,003
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                         22            2,345           3,194
--------------------------------------------------------------------------------
Payables and deferred income                 23            1,935           2,659
--------------------------------------------------------------------------------
Provisions                                   24              146             274
--------------------------------------------------------------------------------
Total current liabilities                                  4,426           6,127
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Loans and borrowings                         22           10,417          11,826
--------------------------------------------------------------------------------
Total non-current liabilities                             10,417          11,826
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                         14,843          17,953
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Share capital                                25            4,282           4,282
--------------------------------------------------------------------------------
Share premium                                25              292             292
--------------------------------------------------------------------------------
Statutory capital reserve                    25            2,011           2,011
--------------------------------------------------------------------------------
Other reserves                               15              298             179
--------------------------------------------------------------------------------
Retained earnings                                          2,656           2,250
--------------------------------------------------------------------------------
Total equity attributable to owners of the                 9,539           9,014
 parent                                                                         
--------------------------------------------------------------------------------
Equity attributable to non-controlling                        91              36
 interests                                                                      
--------------------------------------------------------------------------------
TOTAL EQUITY                                               9,630           9,050
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                              24,473          27,003
--------------------------------------------------------------------------------



Consolidated statement of cash flows

                                                            Note    2015    2014
--------------------------------------------------------------------------------
In thousands of euros                                                           
--------------------------------------------------------------------------------
Cash receipts from customers                                      13,770  10,812
--------------------------------------------------------------------------------
Cash paid to suppliers                                            -7,679  -8,945
--------------------------------------------------------------------------------
Income tax paid from profits                                        -197      -4
--------------------------------------------------------------------------------
Other taxes paid and recovered (net)                              -2,399    -341
--------------------------------------------------------------------------------
Cash paid to employees                                            -1,015    -866
--------------------------------------------------------------------------------
Other cash payments and receipts related to operating                  9     -41
 activities (net)                                                               
--------------------------------------------------------------------------------
Net cash flow of discontinued operations                             -15    -250
--------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES                                 2,474     365
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Purchase of tangible and intangible assets                          -196     -71
--------------------------------------------------------------------------------
Proceeds from sale of a subsidiary                           6         0      10
--------------------------------------------------------------------------------
Proceeds from sale of an associated company                            0       1
--------------------------------------------------------------------------------
Loans provided                                                         0      -3
--------------------------------------------------------------------------------
Placement of security deposits                                         0    -438
--------------------------------------------------------------------------------
Release of security deposits                                           0     701
--------------------------------------------------------------------------------
Interest received                                                      4       5
--------------------------------------------------------------------------------
NET CASH FROM/USED IN INVESTING ACTIVITIES                          -192     205
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Proceeds from loans received                                 22    2,734   4,885
--------------------------------------------------------------------------------
Settlement of loans and borrowings                           22   -5,025  -4,800
--------------------------------------------------------------------------------
Interest paid                                                       -788  -1,091
--------------------------------------------------------------------------------
Dividends paid                                                       -61       0
--------------------------------------------------------------------------------
Proceeds from share capital issue                            25        0   1,375
--------------------------------------------------------------------------------
Other payments related to financing activities                       -88     -76
--------------------------------------------------------------------------------
NET CASH FROM/USED IN FINANCING ACTIVITIES                        -3,228     293
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
NET CASH FLOW                                                       -946     863
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period             17    1,691     818
--------------------------------------------------------------------------------
Increase or decrease in cash and cash equivalents                   -946     863
--------------------------------------------------------------------------------
Increase in cash and cash equivalents through purchase of a            0      10
 subsidiary       6                                                             
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period                   17      745   1,691
--------------------------------------------------------------------------------



Consolidated statement of changes in equity

-------------                                                                   
                 Equity attributable to owners of the parent    Non-cont   Total
                                                                 rolling  equity
                                                                interest        
                                                                       s        
             -------------------------------------------------------------------
               Share   Share  Statutory   Other  Retain  Total            
              capita  premiu    capital  reserv      ed                   
                   l       m    reserve      es  earnin                   
                                                     gs                   
---------------------------------------------------------------          
In thousands                                                                    
 of euros                                                                       
--------------------------------------------------------------------------------
Balance as     3,319       0      2,011      60   1,452  6,842        12   6,854
 at 31                                                                          
 December                                                                       
 2013                                                                           
--------------------------------------------------------------------------------
Total              0       0          0       0     803    803        19     822
 comprehensi                                                                    
ve income                                                                       
 for the                                                                        
 period                                                                         
--------------------------------------------------------------------------------
Transactions     963     292          0     119      -5  1,369         5   1,374
 with                                                                           
 owners:                                                                        
--------------------------------------------------------------------------------
Increase of      963     292          0       0       0  1,255         0   1,255
 share                                                                          
 capital                                                                        
--------------------------------------------------------------------------------
Change in          0       0          0       0      -5     -5         5       0
 non-control                                                                    
ling                                                                            
 interests                                                                      
--------------------------------------------------------------------------------
Formation of       0       0          0     119       0    119         0     119
 equity                                                                         
 reserve                                                                        
--------------------------------------------------------------------------------
Balance as     4,282     292      2,011     179   2,250  9,014        36   9,050
 at 31                                                                          
 December                                                                       
 2014                                                                           
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Balance as     4,282     292      2,011     179   2,250  9,014        36   9,050
 at 31                                                                          
 December                                                                       
 2014                                                                           
--------------------------------------------------------------------------------
Total              0       0          0       0     467    467       -22     445
 comprehensi                                                                    
ve income                                                                       
 for the                                                                        
 period                                                                         
--------------------------------------------------------------------------------
Transactions       0       0          0     119     -61     58        77     135
 with                                                                           
 owners:                                                                        
--------------------------------------------------------------------------------
Dividends          0       0          0       0     -61    -61         0     -61
 paid                                                                           
--------------------------------------------------------------------------------
Change in          0       0          0       0       0      0        77      77
 non-control                                                                    
ling                                                                            
 interest                                                                       
--------------------------------------------------------------------------------
Formation of       0       0          0     119       0    119         0     119
 equity                                                                         
 reserve                                                                        
--------------------------------------------------------------------------------
Balance as     4,282     292      2,011     298   2,656  9,539        91   9,630
 at 31                                                                          
 December                                                                       
 2015                                                                           
--------------------------------------------------------------------------------



Full text of Arco Vara's Annual Report 2015 is published on Arco Vara corporate
website www.arcorealestate.com and is also attached to this announcement. 


         Marek Pontus
         CFO
         Arco Vara AS
         Tel: +372 614 4662
         [email protected]